Do Stable Exchange Rates Lead to Stable Economies?

Abstract

The purpose of this paper is to empirically investigate whether or not there is a relationship between the exchange rate regime and the economic stability. This paper applies a conditional variance analysis and a change point analysis. The result shows that the exchange rate volatility is associated with the freedom of the float. However, the effect of the exchange rate regime on other variables is not clear and varies across countries. Although there are volatility changes in economic variables accompanying the regime shift. The changes are not necessarily attributable to the regime shift occurred in the beginning of the 1970s.